Emerging-market equities post sharp losses

PolyaLesova

NEW YORK (MarketWatch) -- Emerging-market equities around the world posted steep losses on Tuesday, as a tumble in crude oil prices and worries about the U.S. financial sector prompted investors to sell risky assets.

All benchmark stock indexes in the so-called BRIC countries -- Brazil, Russia, India and China -- recorded losses on Tuesday.

"While many economies in emerging markets have begun to decouple from the U.S. economy, the financial markets and sentiment remain very much intertwined."
David Riedel, Riedel Research Group

Many emerging markets, such as Russia and Brazil, are big exporters of commodities and have greatly benefited from the recent surge in commodity prices.

However, crude oil led a broad retreat in commodity prices on Tuesday.

Crude futures closed down more than $6 a barrel, the biggest daily drop in more than 17 years, as concerns that slowing economic growth will dampen oil demand triggered a broad sell-off in energy commodities. Earlier, the contract slumped $9.26, or 6.3%, to an intraday low of $135.92. See Futures Movers.

The broad sell-off in emerging markets overshadowed a moderate decline in the U.S. benchmark indexes, which came back after oil futures plunged. The United States is the world's largest oil consumer. See Market Snapshot.

Rising risk aversion

Rising risk aversion is making investors selective in their approach to emerging markets, Riedel said.

"We continue to believe that the strength in domestic economies of larger emerging markets will provide strong consumer plays long term, but a shakeout in financials and a lack of support in energy makes for a difficult investing environment [near term]," he said.

Analysts at UBS said in a research note this week that their equity risk appetite indicator has moved further into "extreme risk aversion territory."

"Deteriorating risk appetite was led by defensive equity positioning and heightened volatility which more than offset any improvement in the foreign exchange and credit component," they said.

Emerging markets funds tracked by EPFR Global posted outflows of $3.41 billion during the week ending July 9, extending their losing streak to five straight weeks.

"Discussion in recent months about decoupling has failed to differentiate between investing markets decoupling and underlying economies decoupling," said Riedel.

"While many economies in emerging markets have begun to decouple from the U.S. economy, the financial markets and sentiment remain very much intertwined."

The failure of IndyMac Bancorp Inc. as well as the U.S. government's rescue plan for mortgage giants Fannie Mae
FNM, +7.06%
and Freddie Mac
FRE, +3.02%
have underscored the depth of the financial crisis in recent days, denting sentiment among investors.

In Asia overnight, financial stocks took another beating, sending most regional indexes down by at least 2% Tuesday, on fears about the well-being of the U.S. banking and housing markets. See Asia Markets.

Taiwan's Taiex index slumped 4.5% to finish at its lowest level in more than a year. Hong Kong's Hang Seng index fell 3.8%. In Thailand, the SET index fell 3.3% and Pakistan's KSE-100 index dropped 2%. In South Korea, the Kospi index dropped 3.2%.

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